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The BSE PSU Index had a brilliant run in the last three years, delivering staggering returns of over 45 per cent. Naturally, this leads us to the question - should you invest in PSU funds? Let's find out.
Historically, PSU (public sector undertaking) companies have largely been overlooked by fund managers owing to their weak fundamentals and high levels of inefficiency.
However, the 10-year returns of the BSE PSU index seem to buck the trend. Between 2014 and 2023, it fetched returns of 14.07 per cent, not far behind the Sensex's returns of 14.34 per cent during the same period.
The numbers are even more encouraging in the 2021-2023 period, with the index generating returns as high as 45.4 per cent and a positive PAT (profit after tax) growth of 60.9 per cent.
A decade of two halves
PSU stocks witness a turnaround in last three years on the back of profit growth
| 2014-20 | 2021-23 | |
|---|---|---|
| Returns (%) | 2.9 | 45.4 |
| PAT growth (%) | -4.2 | 60.9 |
| Note: Returns and PAT growth of BSE PSU TRI | ||
This uptrend has been aptly captured by Mr Amit Nigam, Fund Manager at Invesco Mutual Fund . In a recent interview, he highlighted, "2022 was a year when the stock prices of most PSUs staged a very strong performance, and we observed a turnaround in the business environment for quite a few PSU entities across businesses, which resulted in an improvement in their ROEs . This change led us to enhance our asset allocation to include some of the 'public sector enterprises'."
Other mainstream funds have also bulked up on PSU stocks. We found diversified equity funds (particularly flexi-cap funds) to have doubled their holdings from nearly 3.7 to 6.5 per cent of AUM (assets under management) in 2023 alone.
But, do high returns indicate strong financials? Let's find out.
All that glitters is not always gold
While there are some PSU stocks that have delivered over 80 per cent returns in 2023, they lag on parameters such as quality, growth and value.
Based on Value Research's Stock Ratings , the ratings of these companies have either stayed the same or declined even as most of these stocks delivered triple-digit returns.
Blockbuster returns, underwhelming fundamentals
These PSU stocks delivered good returns yet saw a decrease in quality, growth and value since March 2022
| Company | Returns (%) | Deteriorating factor | Weights in BSE PSU Index (%) |
|---|---|---|---|
| Power Finance Corporation | 239 | Value: 7 to 5 | 3.25 |
| ITI | 194 | Quality: 2 to 1, Growth: 5 to 4, Value: 2 to 1 | 0.17 |
| NLC India | 194 | Growth: 7 to 6, Value: 8 to 4 | 0.43 |
| SJVN | 166 | Quality: 8 to 5, Value: 7 to 2 | 0.38 |
| Bharat Heavy Electricals | 144 | Growth: 6 to 3, Value: 2 to 1 | 1.45 |
| Bharat Electronics | 84 | Quality: 10 to 9, Growth: 7 to 5, Value: 5 to 3 | 7.87 |
| NTPC | 87 | Quality: 4 to 3, Value: 7 to 5 | 8.63 |
| Note: Returns are for 2023. Weights in BSE PSU Index as of December 31, 2023. Period under consideration for deterioration in quality, growth and value score is March 2022 to December 2023. Factors not mentioned for each company have remained the same. | |||
Our take
Although the fundamentals of PSU stocks remain steady, their valuations are not so attractive right now. Thus, if you are keen on investing in such companies, it is better to take exposure through flexi-cap funds , rather than investing in a specialised PSU fund.
Also read: Are quality indices more profitable and resilient?
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